Colliers International Group Inc (CIGI) 2006 Q4 法說會逐字稿

Welcome to FirstService Corporation's fourth-quarter and year-end 2006 results conference call. Today's call is being recorded.

Legal counsel requires us to advise that the discussion scheduled to take place today may contain forward-looking statements that involve risks and uncertainties. Actual results may be materially different from those contained in these forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements is contained in the company's annual report on Form 10-K and in the Company's other filings with Canada and U.S. securities Commissions.

At this time for opening remarks and introductions, I would like to turn the call over to the founder and Chief Executive Officer, Mr. Jay Hennick. Please go ahead, sir.

Thank you and good morning, everyone. I am Jay Hennick, Chief Executive Officer of the Company and with me today is Scott Patterson, our President and Chief Operating Officer John Friedrichsen, Senior Vice President and Chief Financial Officer.

This morning, FirstService reported record fourth-quarter and year-end financial results. For the year, we exceeded $1 billion in revenue for the first time in our history. We celebrated our first full year as a global company and we strengthened our focus as a property services company. And we also continue to build value for our shareholders with impressive internal growth, a number of smaller but important acquisitions and we also completed a significant divestiture. For the year, revenues were up 64% while earnings were up 54% and earnings per share up 51% over the prior year, itself a record for FirstService.

Our decision to spin off Resolve as an independent public company was made to sharpen our focus on property services and redeploy our capital to drive growth in our other property service platforms. Resolve made the transition to an income trust through a successful IPO just prior to our year-end.

We are especially pleased with the role that we played in establishing and building the Resolve brand in North America and in setting the stage for its management team to take this business to the next level. The transaction resulted in a significant after-tax gain and this together with our other available capital provides us with a warchest of about $300 million to invest in new growth opportunities going forward.

Both the quarter and the year were highlighted by outstanding performances from our commercial real estate, residential property management and property improvement platforms. These results were achieved through a combination of strong internal growth, disciplined operational management and selective acquisitions. Scott will provide the operational details and more of the highlights in just a few minutes.

Looking forward, we started the current year with the announcement that Colliers had increased its stake in central and Eastern Europe from 60% to 80%. The balance of the equity of course is owned by management. This revision includes operations in Poland, Romania, the Czech Republic, Slovakia and Hungary and our business in this region is already significant, employing more than 150 people and advising on more than $800 million in transactions last year. A stronger presence in this region and in other emerging markets is an important part of our growth strategy for Colliers. We expect to continue to invest in these areas following the FirstService partnership philosophy of being partners with operating management. We believe that this is even more important in emerging markets, where focus and committed managers bring experience and knowledge and perhaps most importantly stability to assist new real estate investors in these markets.

Last week, we also announced three smaller acquisitions adding about $8 million in annualized revenue. In residential property management, we acquired a leading player in the Orlando, Florida market and we're in the process of integrating that business with our existing operations. And in property improvement, we added two more California Closets franchise operations in Bakersfield and in Sacramento, California, continuing to build on our strategy of selectively acquiring franchise operations in growing markets, where we see an opportunity to enhance their growth and profitability.

Building on the strong results from fiscal 2006 and the favorable operating environments in which we currently operate, we're confident that FirstService will continue to deliver a very strong year of performance in this current fiscal 2007. Based on the current financial outlook, we expect earnings per share this year to come in between $1.12 and $1.22, which is up between -- to 22% over last year, not counting any acquisitions which we might make from here. Obviously, any acquisitions we complete will be additive to these numbers.

We enter the new year with an enviable track record, thirteen consecutive years of growth in revenue, earnings and earnings per share. And in 11 of those years, we grew by more than 20% over the prior year. We're proud of this record of achievement; it's the reason we have been able to continue to deliver exceptional returns to our shareholders over a long period of time.

Over the next five years, our goal is to be at $2.5 billion company. That's more than twice where we are today with a stock price that's also more than double. To accomplish this, we're going to have to continue to do all the right things and we're going to have to continue to be disciplined in our execution. We're going to have to grow internally across the board by about 10% on average. We're going to have to continue to balance our internal growth with a steady stream of smaller tuck-under acquisitions. And we're going to have to continue to make important decisions about our strategic focus, about the way we manage our business and about the way we plan to grow in the future.

The divestiture of Resolve set the stage for FirstService to strengthen its focus on property services and it gave us the resources to capitalize on the best opportunities available. Appointing Scott Patterson as President and COO will help us better focus on internal growth and free me up to do a better job with acquisitions and new initiatives. And to achieve our goal over the next five years, we're also going to have to be more proactive about adding services, about leveraging our customers and broker channels and about finding new ways to generate incremental revenue streams.

Needless to say, our goal of doubling our size and doubling our share value is very ambitious. However, I'm confident that we have the right business model, we operate in the right service areas and we have the right people on the bus to be able to achieve our goal and to be successful over the long term.

In summary, we had another great year, all of our service lines are doing well, our balance sheet is stronger than ever and we are otherwise in an excellent position to capitalize on the opportunities ahead. Now let me ask John to take you through the financial details for the quarter, Scott will then provide his operational report and finally we will open it up to questions. John?

Thank you, Jay. Consistent with our fiscal 2005 year, we once again delivered operating results at the top end of our range of expectations and our fiscal year ended March 31, 2006. My comments will address both our fourth quarter and annual results on a consolidated basis, our balance sheet and outlook for fiscal 2007. As reported by GAAP, reported operating results for the quarter and for the year exclude those of the previously announced sale of our Business Services Operations' Resolve Corporation two weeks prior to the end of our fourth quarter, the results of which are classified as discontinued operations for the current year comparing periods.

For the fourth quarter, consolidated revenues grew 24% to 247.9 million from 200.1 million in the same period last year. Internal growth was approximately 17% for the quarter, including about 1% from foreign exchange arising due to the stronger Canadian dollar and the balance attributable to acquisitions.

EBITDA in the fourth quarter totaled 10.1 million, up 90% compared to 5.3 million in the prior-year quarter and attributable primarily to strong year-over-year performance by our commercial real estate operations, including the L.A.-based Colliers Seeley business acquired in our third quarter.

From continuing operations adjusted net earnings increased to 1.9 million compared to a loss of 0.5 million in the fourth quarter last year, resulting in adjusted diluted earnings per share of $0.06 compared to a loss of $0.03 last year. For the year, our revenues grew 64% to 1.068 billion compared to 651.4 million in the prior year. And term growth for the year was 20% with about 2% due to foreign exchange while acquisitions contributed to a growth in revenues of 44%. Meanwhile, EBITDA increased to 88.8 million, up from 56.4 million or 57% on strong performances in our commercial real estate, residential property management and property improvement service lines.

From continuing operations, adjusted net earnings increased to 32.3 million, up 54% from 21 million last year while adjusted diluted earnings per share totaled $1.01 compared to $0.67 last year, up 51%. I refer to adjusted net income and diluted earnings per share for the fourth quarter and the year to exclude the accelerated non-cash amortization of the brokerage backlog and tangible asset related to acquisitions in our commercial real estate operations.

Brokerage backlog amortization expense for the year was 7.5 million or $0.14 per share compared to 8.7 million or $0.18 per share last year. As Jay indicated in his comments, FirstService completed the previously announced sale of Resolve through the initial public offering Resolve business outsource income fund on March 17, 2006, about two weeks prior to our year end. FirstService reported an after-tax gain of 35.8 million on the sale of Resolve, which as previously mentioned was classified as discontinued operations. FirstService received aggregate consideration on 137.4 million, comprised of 117 million cash and 20.4 million in units of a trust, representing an ownership interest of about 7%. While our intention is to ultimately divest this retained interest, in the near-term, we're pleased to hold this investment, which will pay to us a cash pretax yield of 10% in what we consider to be a solid business run by an experienced management team.

During the 11.5 month period that we owned Resolve in fiscal 2006, we generated revenues of $160.2 million and 18.3 million of EBITDA, resulting in net earnings of 5.6 million and earnings per share of $0.18 (indiscernible) as discontinued operations.

Our cash flow from continuing operations totaled 57.7 million for fiscal 2006, up from 36.4 million last year, an increase of 59%. Our investing activity decreased as we focused on tuck-under acquisitions during fiscal 2006. We invested 26 million in acquisitions including a majority interest in Colliers Seeley and increasing our stake in CMN to about 83%.

Meanwhile, capital expenditures increased to 18.8 million from 12.5 million last year as we invested in additional fixed assets to support our growth and improve efficiencies, primarily in our commercial real estate, residential property management and property improvement operations. Despite the increasing CapEx, our investment remains below our target but not greater than 2% of annualized foreign aid revenues and about 20% of annualized run rate EBITDA. We expect to remain below these levels of CapEx in fiscal 2007.

We were also repurchasers of our stock during fiscal 2006, acquiring just over 570,000 shares, representing just under 2% of our outstanding shares prior to the repurchase at an average cost of $23.90 U.S. per share. We will continue to look at repurchases selectively when we believe circumstances warrant.

Turning to our balance sheet, our net debt position stood at about $81 million at year-end compared to 182 million at the end of last year, reflecting our strong cash flow from operations and the cash proceeds received as a result of Resolve's sale, all resulting in a leverage ratio expressed as net debt to EBITDA of just under 0.9 times and well below our historical operating range.

At the beginning of fiscal 2006 and well before a decision to sell Resolve, we completed a $100 million issue of senior notes bearing a fixed interest rate of 5.44% due in April 2015 and with an eight-year average life. The proceeds of this long-term financing received in April 2005 were used to repair a revolver, which can be drawn to fund the CMN acquisition. Simultaneous with a note offering, we increased the amount of our revolving credit facility to 110 million and extended it to a term of three years. And finally, earlier in the year, we unwound our remaining floating rate interest rate swaps on our other 136 million senior notes, resulting in all of our debt outstanding being at a fixed rate of interest averaging about 6.6%. With the proceeds from the sale of Resolve, our strong cash flow from continuing operations, favorable terms on our debt and low leverage, our balance sheet is in great shape with ample capacity to support our growth plans.

As noted in our press release earlier today, FirstService has been recording compensation expense related to stock options granted since April 1, 2003. Effective April 1, 2006, FirstService has adopted FAS 123 share based payment, FAS 123(R) requires that share-based compensation transactions, including grant of employee stock options be accounted for using a fair value based method and prescribes detailed calculation methods. The adoption of FAS 123(R) will result in a cumulative effect of an accounting policy charge of $1 million which will be recorded in the quarter ended June 30, 2006 and represent a nonrecurring, non-cash expense.

Looking forward to our current year, fiscal 2007, we are reiterating our preliminary outlook previously provided in January and updated in March to reflect the sale of Resolve. We project a range of revenues of between 1.125 and 1.2 billion, EBITDA in the range of 96 to 105 million and adjusted diluted earnings per share range of $1.12 to $1.22. This updated outlook is based on the current economic conditions in our markets remaining unchanged for the balance of our fiscal year and no changes in Generally Accepted Accounting Principles that would materially impact the results. It also excludes the onetime non-cash charge in connection with the adoption of the new stock option pronouncements that I just mentioned, which will equate to about $0.03 per share.

It's also important to note that the amounts included in our outlook do not include the impact of any acquisitions or divestitures that may be completed after today and prior to the end of fiscal 2007.

I would also like to remind you that the above outlook is forward-looking, that actual results may differ materially and that FirstService undertakes no obligation to update this information. Now over to Scott for the operational highlights. Scott?

Thanks, John. As you've heard, we continue to generate strong internal growth in the fourth quarter, capping off our year where we grew organically by almost 20%. I will go through each of our four platforms and provide brief operating highlights, focusing on our internal growth strivers. Let me start with commercial real estate, which operates under the Colliers International brand.

As Jay and John have indicated, the positive trends experienced through the first three quarters in this platform continued through our fourth quarter. Revenues for the fourth quarter were up 32% in total, including the acquisition of Seeley, 15% organically. The strong performance continues to be driven by increased brokerage services due to a healthy international investment market. Internal growth was particularly strong in North America, and Australia/New Zealand. We benchmarked our quarterly growth against regional market growth. And on this basis, we believe we continue to improve our competitive position in North America and internationally.

At year-end, our pipeline of transactions remains strong and close to historical highs, which provide us with sufficient visibility to be optimistic about the expected results in Colliers due to the first two to three quarters of fiscal 2007.

Our fourth-quarter EBITDA margin for Colliers was 5.8%, which is up significantly from a margin of less than 1% in the prior-year quarter. This margin improvement reflects some operating leverage but primarily reflects a change in the broker compensation model, resulting in lower commission expense early in the calendar year until minimum thresholds are achieved. This change also means higher commission expense later in the year, which will serve to soften the historical seasonality pattern of this business. Our expectations then are the margin for the December quarter will be flat to down from the 8.2% generated last quarter.

During the fourth quarter, Colliers augmented its North American leadership team to more fully leverage the momentum in growth it is experiencing. Glenn Esnard was recruited to be President U.S. Brokerage Services and David Bowden was named President, Canadian Brokerage Services. These are two very capable individuals in newly created, impact positions necessary in response to the expansion achieved this year and in planning for the expansion and acquisitions expected in fiscal 2007.

Let me now move onto residential property management, where in the fourth quarter, our revenues grew organically by an impressive 26% over the prior year. This growth is being driven primarily by new contract wins. You've heard from me the last few quarters that there are three trends driving these contract wins. Growth in the market through our new construction and condo conversions; secondly, a continuing trend by associating [boards] away from self-management and towards professional management; and finally we are increasing our market shares and continue to differentiate ourselves and leverage our competitive advantage. I could tell you that much of the internal growth in the fourth quarter was again driven by the first factor, new development, particularly in south Florida, where our operations grew almost 40% versus the year-ago period.

Our size and experience in leading edge systems and processes position us very favorably with [the large] developers and homebuilders relative to our competition. We have benefited from this competitive advantage throughout the hot development market of the last couple of years. And while we certainly see signs of the market cooling, we expect to continue to benefit from new development well into this year as buildings are completed and turned over to homeowners.

For the full year, our residential property management division grew internally at 23%. This is not a sustainable internal growth rate for this business and our long-term goal is internal growth of low to mid double digits compared to a market growth rate, which has averaged 80% historically.

The EBITDA margin for the quarter was 7%, down from 8% in the prior-year period due primarily to changes in revenue mix and timing with proportionately less higher margin ancillary service revenue. During the year, we added 75,000 new units in this division, which adds relatively low-margin management revenue immediately and longer-term provides us with the opportunity to add ancillary revenue at the discretion of the board. As unit growth slows, we would expect to see more apparent margin improvements. For the year, our margin in this division was up slightly from 8.8% to 9.1%.

Property improvement. Revenues in this division grew 9% for the quarter with internal growth at approximately 4%. This internal growth rate is down from the 15% average for the first three quarters of this year, which is really reflective of a very strong fourth quarter in fiscal 2005, particularly from California Closets and Paul Davis Restoration, which were both up 20% in the fourth quarter last year but up only slightly year-over-year for the current fourth quarter. The shining star in this division for the quarter was CertaPro Painters, with systemwide sales in the seasonally slow quarter up 50% and [envokements] that reflect very strong momentum into fiscal 2007. The CertaPro franchisee model has been refined over the last year to accelerate franchisee productivity and results are starting to show. Average franchisee sales are up significantly over prior years and continuing to grow. We are optimistic in both CertaPro and believe it is emerging as a real growth driver for this division.

EBITDA margin in our property improvement division for the seasonally slow fourth quarter was up slightly over the prior year, a little bit of a breakeven. For the year, however, our margin was up 140 basis points to 19.2%, driven primarily by operating leverage.

Moving on to integrated security. Our revenues for the quarter grew 12% over the prior year, 8% after adjusting for a strengthening Canadian dollar. Our Canadian and U.S. security operations contributed approximately equally to our growth in the quarter. In Canada, (indiscernible) should be buoyed by strong results in a stronger [branch] from growth in both manpower services and security systems installations. The Canadian operations built momentum throughout the year, as evidenced by sequential revenue growth in each of the four quarters. This strength is expected to continue through fiscal 2007.

In the U.S., our operations generated stronger revenues relative to the prior year, as certain [levered] systems installations jobs, which came on stream in the third quarter continued through the fourth quarter. The U.S. pipeline remains quite strong relative to a year ago and the revenue outlook for 2007 is positive.

The EBITDA margin for our security division was 3.4% in the quarter, down from 5.9% in the prior year. This margin reflected 7.5% in the Canadian operations combined for a breakeven quarter from our U.S. operations. Our margin is healthy enough year-over-year in Canada, while in the U.S. we continue to experience competitive pricing pressure. The U.S. margin was further impacted during the quarter by a onetime unusual warranty expense and bad debt expenses. For the year, our margin in this division was 5.1% compared to 7.2% in the prior year.

That concludes my operational comments. I'd now like to ask the operator to open up the call to questions.

(OPERATOR INSTRUCTIONS). Frederick [Bastian], Raymond James.

Good morning. CMN ended the year with an EBITDA margin of 8.3%. As you brought in your service offering, how much margin improvement can we expect from this division going forward?

I think as we've indicated, part of the improvement, CMN is going to be operating leverage, higher margin, other services outside of brokerage. So I -- but it will also be tempered a little bit with the change in the brokerage comp model. So overall, our focus is work with the management team to increase this margin on an annual basis and over time, we would like to see this in the low double digits but it will take a while to get there.

So do you think you can get closer to what your comps like Collier, CB Richard Ellis and Jones Lang Lasalle are actually generating?

That's a great goal to have, but you also have to understand there's other elements to those businesses which we are presently not active in or active in a much, much smaller degree, in which we will over time increase.

I was just going to add to that. Some of the comps comparing the results of the comps are very difficult because some of them are significantly in the asset management business that have very high margins and business mix in some of the others are also different. And so if you compare, as we do, our broker margins versus our comp broker margins, we are right in line and in many cases better than our comps. But when you marry the ancillary service fees to that, that's where the change in margin comes from.

Okay, that's helpful, thanks. There's mounting evidence that the residential sector, obviously, in the U.S. is reversing course. What kind of impact do you think this might have on your Property Improvement Services division as people have less money to spend on say California Closets or (indiscernible) their houses and all that stuff?

The home improvement market, the remodeling market, grew at about 10% in 2005, which is up from a historical rate of around 6%. Our growth in all of our franchise systems has exceeded the market rate growth. Our expectation is that it will slow particularly with California Closets over the next few years. But we are expecting the remodeling market to continue to grow and certainly the data available does point to continued growth in the home remodeling market.

Okay. Maybe one last question. You mentioned Eastern Europe as an area of focus for CMN. What other areas are you finding attractive right now and this is going to be an area of focus for you as well?

Well, we're looking at all the emerging markets. One of the great benefits of the CMN acquisition was a deep and long tradition in emerging markets. And so we earlier in the year changed our ownership structure in India to take full control of the Indian operations. We see that as a growing market for us. Our operations in Asia, Hong Kong and real China are doing extremely well as more investors invest there. And we're also in South America and looking at some opportunities to enhance our operations there. Principally following the real estate of the global real estate investors who are looking for higher yields in some of these emerging markets and it creates great opportunity for players like us that have infrastructure in those markets, where we can introduce our long-standing clients to new markets that have better return possibilities.

So we're turning lots of attention to that. The Colliers management team is first-class. They have been in these markets for a long period of time. Their management teams in these markets are very good and so we see that as a real opportunity for FirstService going forward.

Thank you very much. Great quarter.

David Newman, National Bank. Mr. Newman, please check your mute button.

Great quarter, as always. Starting to sound like a broken record, but great quarter. Trying to dig into the CMN numbers and just understand some of the underlying trends.

In terms of your backlog, are you seeing the backlog, the real estate transactions, geographically be in the markets where you are already experiencing obviously U.S., West Coast, Aussi and New Zealand, is that primarily where most of the backlog lay or is there some trends there that we should note?

David, this is Scott. Our backlogs at CMN are strong across the board. They continue to be strong in North America and in all of our offices. We had a concentration on the U.S. West Coast, so naturally a high percentage of our backlog in North America would be focused there but that's where we are.

Very good. I guess Colliers was known as being obviously somewhat more focused on the industrial or warehouse side. Are the reps moving up the value chain into other segments such as the office space or has there been a transition at all?

It's very regional. I would say Colliers has a very strong office presence in many markets. They might be one or two in certain markets. It really varies by market. But that, David, is a growth opportunity.

One of the things that the management team at Colliers is very good about is understanding where they are strong and where they are not and what they need to do to get to have a stronger presence in some of these markets. And they're looking at segmentation very closely. They track business unit, they track branches by segmentation. And so that's obviously an opportunity to enhance the business.

But there's several ways to make money in a business like that and so there's nothing wrong with the industrial market and there's nothing wrong with the midmarket either.

Very good. I know you guys had this over a year now and one of the initial comments you guys made was you want to over time shift maybe some of the business out of the -- obviously brokerage is doing extremely well. Has there been any move at all or do you have any plans to diversify that mix and what are your action plans in that regard?

Well we've actually taken many steps and we continue to focus a lot of energy on enhancing the commercial real estate platform. As you know, David, we started a mortgage banking business in Canada called Colliers Mortgage, Colliers International Mortgage Corporation. It's been a very successful startup. We recruited a key team of operators from one of the big financial institutions here, not yours, David. And it's been a great success. And the key to that business was obviously to do what they already did well but also leverage the channel. Why would we not be able to offer our clients mortgage financing at the same times they make a purchase of real estate. Or if we are helping them sell real estate, why can't we help facilitate the sale by providing some debt capital. So we have done that in Canada. We're looking at doing that in a major way in the U.S. as well. We have got a very defined strategy of how to do that, and it's going to take some time to execute on that strategy but that's one example.

Another example that we, as you know, have leaned heavily on is our property management business, a business that we know very well on the residential side. We are the largest third-party property manager in Canada and we see opportunities to expand our property management business in the U.S. significantly over the next number of years, which also creates additional revenue. We see -- and profitability -- not to the same margin level perhaps but creating additional opportunities for us.

We see opportunities in the valuation and engineering business. We see opportunities in a variety of other ancillary type services around commercial real estate. So, we see the business very similar to the way we saw property management, as an opportunity to take a great business with a great channel that served clients at the highest levels and introduce other market leading services around that base relationship. So, it's going to be a work in process but we are excited about it.

Very good, last question, if I might. You have obviously got a big wad of cash on your balance sheet and certainly available lines. Pace of deployment, what can we expect for this year? And would you consider at any point instituting a dividend?

As you know, we talked about dividends. We still continue to talk about dividends. Our position continues to be we see some interesting growth opportunities. We would like to first see some of those through and then we will reevaluate our position with respect to capital. And this really goes to the second or the first part of your question, which is pace of acquisitions or pace of growth or pace of deployment of capital.

We think that we're going to continue to do our growth one step at a time as we always have. But I have to say that we are seeing some interesting opportunities in a number of different areas, some of the global. And so one of the, again, one of the great opportunities is to leverage infrastructure in different geographic regions and help them grow the business. So my comments earlier about brokerage and property management and valuations and engineering reports apply in North America in the same way as they do in Eastern Europe and in Australia and New Zealand and in other parts of Asia. So there's multiple ways for us to grow our business. In terms of pacing, it's hard to say because we've got to be opportunistic as we go. We've got some interesting opportunities we're looking at.

Excellent, great quarter, guys. And you guys look like you are in fabulous shape.

Thanks.

David Gold, Sidoti.

Hi, good morning. A couple of questions. First, Scott, on the securities side, can you talk a little bit more about what you have done in the U.S. to kind of turn it around and basically I guess what gives you the confidence that we will get there?

Well, we certainly have confidence and some visibility into our revenue stream for 2007. We are focused currently on improving our margins from those revenues and we're attacking that on several fronts. We're working hard at our pricing policies. Frankly, we're looking strategically as to whether we're leveraging our strengths sufficiently and focusing on all of the right markets and the markets where we differentiate ourselves and support a higher margin. And we're looking at our fixed costs and our processes. We think we can operate more efficiently. We are on it. That's an area that we want to see improvement this year.

Okay, fair. Jay, if you could talk a little bit about -- with the changing compensation in the commercial real estate business, putting that sort of side by side with your comments about looking to leverage the business a little bit and presumably getting some growth in there, and that is where you look for some upside. Would it be fair then to assume that maybe the margins that we saw for fiscal '06 might be the peak that you would see and the rest of the upside is going to come from the top line? Or do you think there is still some margin opportunity there?

John may have a point of view on this. I think that we've done a great job from day one on enhancing the margin in this business. We have put -- that was one of the key areas of opportunity that we saw. This business was generating give or take 5% EBITDA margins when we bought the business. We spent lots of time with the management team at understanding what the drivers were behind that. That resulted in a change to the broker comp model, which has now been virtually rolled out across North America. You're seeing the benefits of that in the fourth quarter for the year. But I still think that we've got some room in same store core margins in that business. If business continued as it is currently, I think there's still some more room there. But we will move our margins up as we ask and encourage our brokers to do more to sell ancillary services to their clients. That's how they will do better and that's how we will do better and our margin will increase. I don't know, John, do you have anything (multiple speakers)?

The only thing I would add, David, is that though CMN has been established in Asia for some time, it is still an emerging market for us and last year absolutely contributed positively to our earnings. But it's still not at a margin which we would expect once that area becomes more fully developed, we'll get that margin up. And until then, it's going to be a little bit of a drag on our overall margins. But that enhancement and building that business will positively impact our margins as we grow in those areas.

Okay, so as we look at it for say the next four quarters versus last year, should we think about it, John, as being maybe a little bit smoother than last year but the net will be the same or better?

I would say smoother and you know we should benefit a little bit from operating leverage as we grow the business. But as Scott indicated earlier, the new broker comp model will dampen the market toward the end of the year. I think net-net, if we can generate the same margin we did last year on higher revenues, we'll be in pretty good shape but hopefully we can do slightly better.

Got you, and just one last one, if I might. Jay, on the acquisition front, you know as you point to with $300 million available, I know it is hard based on -- it sounds like you're looking at a few different things and timing can always be difficult. But if we go out a year, what would it take for you to sort of do the coming year successfully from an acquisition standpoint? Presumably, it wouldn't be putting all that money to work, would it?

We don't look at it as all that money to work. We look at it -- I think our goal -- I think it is safe to say that my goal was to replace the Resolve $20 billion of EBITDA over the next 12 to 18 months. And if we do that at half the cost, we're doing really, really well. And so, that's kind of the goal that we've talked about internally here. I think it's doable and then we will continue to move forward and decide where we're going to best allocate our capital.

You did say half the cost, right?

Whatever.

I just wanted to be sure I heard you right. Thanks so much.

Matt Litfin, William Blair & Co.

Hi. It's Tim [McQue] for Matt Litfin. Congratulations on the quarter, guys. Just on the acquisition front, if you could discuss for a little bit, you've mentioned a lot about the opportunities and the Colliers group but outside of that, are there any particular areas that are interesting to you right now? Would a new platform be something you're considering at this point?

You know, obviously, we'd always consider a new platform but the answer is no, we're not considering a new platform right now. But you know we started the year with a couple of tuck-unders in property management. When we look at our pipeline of opportunities, there's a lot in that area that we think we can add over the next 12 months, 12 to 18 months.

Property improvement is another area that we see one or two opportunities that could be interesting. And frankly security is another area that pricing has come back down to an area that we should be looking at selectively. So we're busy in all of our service lines and hopefully we will be able to balance some acquisition growth across the board.

Okay, great. You mentioned pricing. Actually, going back to the emerging markets, can you talk a little bit about the pricing for opportunities in that region and is there a lot of competition for those assets?

You know it's interesting. It depends on the market. In the more mature markets, pricing is not that different than North America. It might be a touch lower but not much difference. And so we're not seeing pricing differences in the mature markets. Emerging markets, frankly, we have not looked very hard at acquisitions because the markets themselves are growing rapidly and what we're trying to do is we're trying to gain more than our share in those markets as new investors come in. So our focus has been really on internal growth in those emerging markets.

Bill MacKenzie, TD Newcrest.

Thanks, good morning, guys. First just I guess a point of clarification on the comments on the commission split changes that you guys have made. Has there been a second sort of phase of changes in the commission split or is it more that this has been rolled out over time? Because I thought we were getting to the point where we would be close to starting to lapse some of those changes but it sounds like Scott mentioned in your comments like in December quarter, we will see some impact from those changes. So can you maybe help me get a better understanding on the timing of those changes?

Bill, it was really being developed. The compensation model first of all works out from a calendar year and it was being developed throughout calendar 2005 and really rolled out in a standard way January 1.

Okay, thanks. And then just in terms of acquisitions and I guess pricing, historically you guys have always had this range kind of 4 to 5 times that you've paid for stuff. Given your increased size and larger acquisitions often require higher multiples and given some of the industries, commercial real estate, some of the multiples that we have seen in that industry have been some sort of higher multiples. Do you see yourself needing to sort of deviate from that historical range? Or are you still comfortable that at 5 times EBITDA there are things out there that you can buy?

Well, you know, the reality is the way we see, there's still lots of tuck-unders in that range. And if there's a great opportunity that we think that we need to capitalize on and it's at a different pricing parameter, we will definitely look at it. We're not going to walk away on the basis of a predetermined formula structure. But we see lots still, Bill, in our range, in our strike zone. And but you know, if the right opportunity presented itself, we would look hard at it.

And how would you look at something -- what would be sort of a new metric to look things if you saw something that would require you to go above 5 times? But like what, would you look at it on a sort of a return on capital basis through a full cycle or a kind of one, two year accretion earnings impact? Like what would be kind of the new financial framework that you would look at if you saw something that you really wanted to have?

Bill, it's John. We continue to look at our acquisitions on a return on invested capital basis. A rule of thumb has been 5 times and that seems to have worked for most of the acquisitions we have done. But there is going to be situations where future growth potential is different. There may be certain costs that can be taken out of larger situations. We have to evaluate those on a case-by-case basis. But at the end of the day, we're going to drive it through a return on invested capital model and it's got to hit our targets, you know a 15% IRR or better. And that is where we're going to go -- that's where we're going to stay, where we have been.

That's great. Very helpful. And then just in terms of the cash balance and I think it's clear that you would like to deploy that towards the acquisitions, but I'm just wondering in the meantime if there are any other things that you can look at specifically on the debt side. Is there any -- can you buy back any of your debt or are the make-whole payments too prohibitive to do that? And secondly on the share buyback, it's a little over 500,000 shares that you bought back in the latter half of last year. Is that kind of the same sort of level of activity on the share buyback that we should expect in '06 if you kind of annualize that for a full year?

First of all, to answer your first question on the make-wholes, they are significant and we look at this capital that is on our balance sheet, the right-hand side of our balance sheet, as long-term capital, which ultimately will be -- has been invested in long-term assets, will continue to be invested in long-term assets. We happen to have some extra cash, obviously, on the balance sheet now. We're going to deploy that in a prudent way. We will look at buybacks and I think as I said in my comments, as circumstances warrant, there were certainly times last year where we felt our shares were undervalued. We could probably come to the same conclusion today and we're going to look at it opportunistically over the next year. But I would not marry ourselves to the same volume. It could be higher or it could be lower than what we did last year.

Okay, great. Thanks. And then just one last question if I could, Scott, on the property management business and the margins down there. You talked about how the mix shift this quarter with some higher sort of management contracts. How long does it take to kind of get those ancillary services into those new contracts? I'm just wondering it sounds like there's still a fairly decent level of new contracts that will be coming onstream in '07 given all the new build activity that happened last year. Should we expect margins to be kind of flat to slightly down just because of the mix issues over the next year? And then in fiscal '08 is when you start getting the margin expansion happening in filling -- with ancillary services?

I think that's fair. When you're adding the number of new units that we are currently, you're adding a relatively low margin immediately and it tends to dilute your consolidated margin in that division? And then over time, we can layer in certain higher-margin ancillary services reasonably quickly, but it tends to be a longer-term prospect. I think as the developed market begins to cool and affect us and our growth rate comes down to sort of the 12 to -- internal growth rate down to 12 to 14%, where we expect to be, you'll start to see our margin improvements become more apparent.

Frederick Bastian, Raymond James.

Just looking at the restated numbers for the full year, your tax rate has gone down but the percentage of minority interest you're paying out has gone up slightly. Are these good run rates to use going forward?

The tax rate was adjusted down a quarter as we did our detailed review and there was the sale of Resolve as well. So we effectively end up with about a 30% tax rate? Going forward, we're probably looking at about a 32 to 33% tax rate would be our estimate for next year.

On the minority interest, it was unusually high in the quarter. That is not something that I would expect going forward. It was just lower management fees that we took. We didn't need them this year as a result of the Resolve sale and so forth. So that impacts minority interest so it was higher this quarter than it would be normally.

But on a go-forward basis for the full year, what are you guys (multiple speakers)

For the full year, it would probably be down slightly.

All right. And of the revenues that you generated -- that was generated by CMN, how much of that was generated at North America?

For which, what are you talking about, for the quarter?

For the full year.

For the full year, North America was probably about 65%.

Okay, thanks.

Bill Chisholm, McDougal McDougal McTier.

Yes, good morning. (multiple speakers) property improvement side, clearly with the California Closet business, you have developed an approach or a system that works very well for the franchising of a number of branches. Is there any opportunity to apply a similar system to any of the other franchise systems, like Paul Davis or CertaPro Painters?

In terms of buying back franchises, Bill, is that what you mean?

And operating them as corporate entities.

To date, the franchise initiatives involved only California Closets franchisees. But I think that there is interest in looking at Paul Davis, which has a similar type of size to some of its larger franchisees in a similar potential, we believe. So, we, as an opportunity arises, may look to branch out [of the] Paul Davis franchise over the next couple of years.

Okay. One other question on the Eastern Europe operation of Colliers. Are the other sort of global international brokerage folks operating in these markets? Or are you competing mainly with local firms?

In most of markets, they are two or three of the globals there and they are different. [Kumenins] is in one or two of those markets. [CBRE] is in most of the markets. JLL is in most of the markets. And there's one or two other larger European companies that have scattered presences in those markets as well. So it's basically all over the map but it continues to be a focus, I think, for most of the major players.

Would you be in the top three in any of the markets?

We are top three in all of those markets, Eastern Europe.

Bill MacKenzie, TD Newcrest.

Just where are you at now in terms of when you look at Colliers globally, in terms of what percentage of Colliers global revenues and offices you have through CMN?

The global numbers from last year were about 1.2 billion. And our run rate is probably close to 0.5 billion. So whatever that percentage is. In terms of number of offices, I just know our number of offices; I can't remember what their total offices -- they may be 250 offices globally. I think we have something like 100 offices globally. So we are close to 40%. Nobody -- the next largest player in the network might be the UK business at about $100 million.

There are no further questions at this time.

Okay operator. Thanks, everyone, for joining us and we will see you at the next conference call.

That does conclude today's conference call. Again thank you all for your participation and have a great day.